Are you timing market perfectly well for good returns?

“Many of my investors are redeeming money out of their mutual fund investments to fund their goals. I am losing assets, but considering the genuine requirement, I am not sure what to do.” Some of the IFAs (Independent Financial Advisers) have shared this in conversations with us.

On probing what these goals are, we discovered that in many cases, the client has invested (or is considering investment) in a plot of land or in a constructed property or a property under construction. In so many of these cases, the money has been pulled out of equity mutual funds. It also came out during the discussions that before requesting the redemption, the client had never mentioned to the IFA about this venture into real estate.

So what prompted this decision to buy real estate? While we have not spoken to the investors directly, what answer we got from the IFAs was quite logical and understandable. They were tired of waiting in their equity mutual funds without seeing any upside, while hearing many stories of people who had made money in real estate or at least they had watched the prices moving up. They are convinced that there is no money to be made in equity, while nobody ever loses buying real estate.

Let us stop here and ask a basic question? Are these investors really funding one of their goals? Or are they only timing the market?

What is market timing? It is an act of shifting from one investment option to another with a view that the latter would offer better performance in future compared to the former. Is this the thought at the heart of the investor’s shift from equity mutual fund to real estate?Is market timing a wrong approach to one’s investments? No, not really. It is just that it requires one to be able to understand the relative movement of two different investment options – equity and real estate in the above case. While timing the markets, one must be sure that the one that the investor is exiting is more likely to underperform the one that the investor is getting into.

Suppose that someone has formed a view that compared to real estate, equity would underperform in future. What could be the basis of such a belief? In most cases, such a belief is developed based on the immediate past performance of the two options being evaluated. If one investment has done much better than another in the past X months or X years, one starts believing that the same would continue in the future.

History suggests, “Past performance may or may not be sustained in future.” Or as King Solomon’s story taught us, “This too shall pass.” Past performance has never been a reliable indicator of the future.

While shifting from one investment to another, it is important for any investor to stop and ask oneself, “Do I really understand what I am doing? Or am I getting swayed by the current trends? Am I extrapolating the current trends far into the future? How much do I know to believe that I have an ability to predict? What has been my track record at predicting future trends?”

You have earned your money the hard way. You owe it to yourself to protect the same from your own silly mistakes.

(Through this article, we are not offering our view on the future performance of any investment. We discussed about equity and real estate only since the conversations were around these.)

The author runs Karmayog Knowledge Academy. The views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.